Let’s talk Series I savings bonds. With inflation running its hottest since the 1970s, Series I savings bonds have been a major topic of discussion this year. Up until this year, I don’t think I had ever heard of Series I savings bonds (probably since they’re inflation-linked and inflation has been sub 2% since my adult working years). I was personally gifted some Series EE savings bonds as a child, but the interest was pennies on the dollar and nothing to write home about. But these Series I savings bonds have gotten a lot of attention and there’s certainly merit behind it. So let’s dive in.
Series I savings bonds are government issued savings bonds that are low risk and pay interest each year. You can find information on the U.S. treasury website here. An important thing to remember about these bonds is that you can only purchase them directly from the U.S. Treasury. No broker dealer can issue these savings bonds. Here’s a few basic facts about them:
- Only $10,000 can be purchased per calendar year, per person.
- The minimum purchase amount is $25.
- The annual interest rate on these savings bonds is derived from a fixed rate and a semiannual inflation rate.
- Interest is added to the savings bond monthly and paid whenever the bond is cashed.
- Minimum holding period is 1 year and maximum holding period is 30 years.
- Interest earned is state-tax free, but taxable on the federal level.
Now, regarding the interest rate… the fixed portion is roughly tied to the federal funds rate. So, current Series I savings bonds are being issued with a 0.00% fixed rate. If you purchase a Series I savings bond right now, half of your overall interest rate is locked in at 0.00%. The other half of your overall interest rate is based on the CPI (Consumer Price Index), which is essentially the inflation rate. For Series I bonds being issued at the time of this blog’s writing, the semiannual inflation rate is 4.81% (multiply by 2 for the annual rate, so 9.62%). So, add 0.00% plus 9.62% and suddenly you have a government-issued, low-risk, savings bond with an annual interest rate of 9.62%!? You heard that right.
So, what’s the catch? Well, there’s not too much of a catch. But, there are a couple of things to be aware of. First, the inflation rate is variable for the life of the bond and changes every 6 months. So, if inflation suddenly becomes under control, your bond could drop down and go back to paying you only 1-2% interest each year. Also, if you redeem your bonds before 5 years, you have to give up 3 months’ worth of interest that you would have otherwise earned. You’re required to hold the bond for 5 whole years in order to not pay the 3-month penalty.
If inflation runs hot for a few years, these Series I savings bonds could be a great investment (though, remember, they’re limited to just $10,000 per year). However, if inflation gets under control, they’ll still need to be held for a few years to prevent having to pay back a few months’ worth of interest.
I don’t think there’s a thing wrong with Series I savings bonds. I personally don’t think they’re quite as good of investments as some might think due to the restrictions and variability of the interest rate that’s based on inflation. If you have some extra cash sitting on the sidelines, but want to keep it relatively safe, these Series I savings bonds could be a great investment for the short to medium term. If you need cash to be liquid and available (as in an emergency fund), these Series I savings bonds may not be worth the lock-up period.
As always, we’re happy to talk through your specific situation to see if these Series I savings bonds make sense for you!
This information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. This information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Any opinions are those of Carson Odom and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Future investment performance cannot be guaranteed and investment yields will fluctuate with market conditions. Investments mentioned may not be suitable for all investors. Raymond James does not provide advice on tax or legal issues. These matters should be discussed with the appropriate professional.